Long-term Effects of Shapella Upgrade: Yield, Competition, and LSD-Fi

Effects of Shapella Upgrade: Yield, Competition, and LSD-Fi over time.

Researcher Lawrence Lee from Mint Ventures explains the possible changes in ETH staking returns in the future and discusses the competitive landscape of the staking industry, as well as the potential impact of LSDfi on the ETH staking ecosystem.

After the Merge, besides receiving rewards from the consensus layer, staking Ethereum can also earn rewards from the execution layer, with a total APR of 5.4%. The consensus layer reward is ETH issued by the Ethereum network, and its release increases as the total staked amount increases, but the staking APR decreases as the total staked amount increases. The execution layer reward includes two parts: 1) the priority fee, which is the part of gas paid by users that is not destroyed, and 2) MEV. The common feature of these two parts is that their profits do not increase as the total staked amount increases, which is the main variable of ETH staking rewards.

According to Lido’s statistics, after the Merge, the consensus layer APR slowly decreases as the total staked amount increases, while the execution layer APR changes greatly, averaging around 1.5%, making staking yields reach 5%. When on-chain activity is frequent, the execution layer APR can even exceed the consensus layer APR, making staking yields approach 10%. In terms of ETH staking earnings composition, taking into account the impact of MEV burn and L2, when ETH staking accounts for 30%, ETH staking rewards are likely to decrease to 3% (consensus layer reward 2.4%, execution layer reward 0.6%). This yield will have a significant impact on users’ enthusiasm for staking.

Based on the recent LSDfi craze, more and more LSD projects will go live, and what happens on unshETH, Agility, and Lybra may be played out in the next 3-6 months, with LSD continuing to generate APR far beyond that of the Ethereum chain, possibly forming a self-reinforcing flywheel effect between LSD and LSDfi. Eventually, all DeFi protocols may be referred to as LSDfi in a broader sense, as they all more or less support LSDfi. Obviously, LSD can capture the beta of LSDfi. The popularity of LSDfi will further promote the share of liquid staking in the overall staking track.

Reference: https://research.mintventures.fund/2023/06/09/the-potential-effects-of-lsd-fi-may-bring-following-the-shapella-upgrade/

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